This monthly update is much longer than normal, but I urge you to read through it, given the current state of the world and economy.
Both the coronavirus (COVID-19) and recent stock market plunge are on most people’s minds these days. I know this because everyone from my Uber drivers to college professors to fellow physicians are telling me about their concerns and asking for my thoughts.
I have been asked:
- Will the coronavirus really spread throughout the US, or is it overblown by the news media?
- Is this a healthcare crisis, a financial crisis, or both?
- Has the next recession finally started?
- Is the market plunge just another “buy the dip” opportunity in stocks?
- Is it the start of a bear market in stocks?
- Are there other asset classes that do well in a recession, or should we sell everything and sit in cash to protect my retirement savings?
These are difficult, but important questions.
I am not clairvoyant, but I definitely do have an opinion on these matters. Here are some of my thoughts, taken one question at a time:
Will the coronavirus really spread throughout the US, or is it overblown by the news media?
I do think that the coronavirus (COVID-19) will soon be declared a global pandemic, and will spread across much of the US. However, people are more fearful of the disease than they need to be, primarily because people tend to fear the unknown. Treat the coronavirus as you would the seasonal flu… that is, wash your hands often and well; sneeze/cough into your shirt or elbow; quarantine yourself and/or your kids if you have a fever, cough, and difficulty breathing; and go to the hospital or clinic if your symptoms become concerning.
COVID-19 likely has a higher death rate (1-2%) than the seasonal flu than we are used to, but it’s not on par with something like Ebola. So don’t freak out, but be smart, stay informed, and stay vigilant.
Is this a healthcare crisis, a financial crisis, or both?
This is an important question.
Currently, there is no cure for COVID-19 and we shouldn’t expect a viable, mass-produced vaccine for AT LEAST 6-9 months. That said, it doesn’t have to become a personal health care crisis to you or your family if you remain vigilant and be smart, as discussed above.
Regarding the second part of the question, I believe that the rapid spread of COVID-19 is a proverbial “black swan” event that has ushered in the next cyclical recession and associated financial crisis.
Has the next recession finally started?
From my research, I was expecting a borderline recession in 2Q 2020, but the virus and its secondary effects have pulled-forward the bad news and magnified its impact.
It is often difficult to see the start of any secular macroeconomic trend, but I believe that–in the future–we will look back and clearly see 1Q 2020 as the start of the next cyclical recession.
Global supply changes are extremely interwoven and interdependent, and have already grinded to a halt throughout much of Asia. This will only worsen as the disease (and fear of the disease) spreads in the coming weeks and months. As the supply change slows, dependent businesses necessarily contract. Contracting businesses usher in a recession. This downward spiral feeds upon itself and is extremely difficult to reverse once it has begun.
Is the market plunge just another “buy the dip” opportunity in stocks?
Short answer, no. It is time to get exceedingly defensive.
Is it the start of a bear market in stocks?
Short answer, yes.
We have already seen the S&P 500 fall approximately 13% from its peak in mid-February. When the market falls this hard and with this (incredibly high) amount of volume, it statistically portends to even harder times ahead.
Based on my research, I would be surprised if the S&P 500 did not fall by another 20% or more in the coming months. When the economy (GDP) and inflation are simultaneously decelerating, it is best to avoid or short (bet against) stocks for the foreseeable future.
Are there other asset classes that do well in a recession, or should we sell everything and sit in cash to protect my retirement savings?
Stocks are not the only investable asset class. This is good news, given the dismal outlook of their performance in the coming months.
Some stocks (like utilities, consumer staples, healthcare, and REITs) tend to outperform other stocks (like technology and energy) when the economy and inflation are slowing. However, when the economy is really awful–as in 2000-02 and 2008-09–then it is usually best to just avoid stocks altogether. I think we are at such a time.
Some asset classes that actually make money during these market conditions generally include “safe haven assets,” such as:
- The US dollar
- US Treasurys
- Municipal bonds
- Gold
- Short stocks (betting they will fall)
- Bitcoin (non-correlated to stocks)
Our plan
Because of the above-mentioned concerns, I started adjusting our portfolios in mid-to-late February from cautiously optimistic (last month) to defensive… then to extremely defensive, as the facts became increasingly concerning.
In light of that, our separately managed accounts are allocated in the following extremely defensive manner:
- 0% US and International Stocks
- 25% US Bonds and Preferred Stocks
- 0% US and International Real Estate
- 50-60% Cash (earning interest)
- 15% Gold and Gold Royalties
- 0-10% Bitcoin
If you are a Vailshire Client, feel free to log into your Vailshire-managed account(s) at Interactive Brokers and notice how your own portfolios are positioned! (It’s a good idea to log into your accounts occasionally, just to make sure your settings and demographics are up to date.)
Conclusion
While we may see occasional daily spikes higher in the stock market over the coming weeks and months, I think that equities are simply too risky and volatile to remain invested in for the foreseeable future. Rather than risking losses of 20% or more from current levels, we will sit on the sidelines with stocks and patiently wait for the smoke to clear.
Our portfolios are now positioned in an extremely defensive manner, in order to protect our assets (and even grow!) while the world’s markets descend into chaos around us.
If you have any questions, or know of a friend or family member who may benefit from Vailshire’s innovative investment techniques, please let me know. I would be honored by the referral.
Investing wisely with you,
Jeff